S&P’s lowers Egypt’s long-term credit ratings

Standard & Poor's has lowered its long-term local currency sovereign credit rating on the Arab Republic of Egypt to BBB- from BBB. S&P's affirmed its BB+/B foreign currency and A-3 short-term local cu

Standard & Poor (S&P)'s Ratings Services has lowered its long-term local currency sovereign credit rating on the Arab Republic of Egypt to BBB- from BBB. At the same time, S&P's affirmed its BB+/B foreign currency and A-3 short-term local currency sovereign credit ratings on Egypt and awarded a negative outlook.

"The lowering of the long-term local currency rating reflects the projected deterioration of the budget deficit and the consequent reduction in domestic financing flexibility," said S&P's credit analyst Serge Ghanem. "The negative outlook reflects the likelihood of a further downgrade if wide budget deficits persist and the general government debt burden continues to rise."

Steps taken to increase revenues and limit expenditures have not been sufficient or timely enough to contain the deficit and reduce the government's heavy debt burden. The central government deficit reached 6.3 percent of GDP in fiscal 2002/2003, which runs from June to July and is expected to widen to 7.3 percent in 2003/2004, due to slow economic growth, a high public wage bill, and sizable interest payments.

The general government deficit is forecast at 4.6 percent in 2003/2004. The net general government debt burden is expected to peak at 92.6 percent of gross domestic product (GDP) by the end of fiscal 2003/2004, before declining to 87 percent in 2005/2006 on the back of lower projected deficits if planned fiscal measures are fully implemented.

The ratings are also constrained by the slow pace of structural reforms in Egypt, due to concerns over the social impact of reforms in a subdued environment. Despite efforts to revitalize the privatization of joint venture companies and banks, the process has slowed. The slow pace of reforms and the lack of involvement of the private sector will lead to moderate GDP growth of 2.4 to four percent in the near term.

Nevertheless, the government has adopted several important measures, mainly in the financial sector. The move to an exchange rate float and the subsequent currency depreciation earlier this year have enhanced Egypt's competitiveness, while improving its ability to adjust to external shocks.

Despite structural rigidities and the imposition of surrender requirements, market distortions have diminished. In parallel, an inflation-targeting framework has been adopted and a recent banking law confirmed the independence of the central bank. Prudential supervision is also improving, and the government-owned banks have been recapitalized.

In addition, Egypt's external indicators remain comparatively strong. Public sector net external debt, at about 60 percent of current account receipts in 2002/2003, is roughly offset by private sector net external assets. External liquidity is also fairly strong, with a small current account surplus emerging in 2002/2003, and gross external financing requirements amounting to less than 40 percent of official reserves. However, the liquidity situation is weakened by the monetary authorities' past reluctance to meet market demand for foreign exchange.

"Recent progress in adopting a floating exchange rate regime, raising fiscal revenues, and accelerating financial sector reforms is positive, but the pace of structural reforms has slowed," said Ghanem. "Another downgrade is possible if adjustment measures are not implemented soon to reduce the fiscal deficit and the pace of structural reforms does not pick up. Conversely, structural reforms will facilitate the debt-reduction process by boosting economic growth, provided the political will for faster implementation can be mustered." — (menareport.com)